Trans-Pacific Partnership: Should Indonesia Join It or Not?

The Trans-Pacific Partnership Agreement (TPP) was signed last October and is expected to start operating about two years from now.

Indonesia already has free trade agreements (FTAs) with seven of the current 12 TPP countries. These seven countries together account for more than 75 percent (about US$58 billion in 2014) of Indonesia’s exports to the present TPP countries. In addition, all the TPP countries are already members of the World Trade Organization (WTO), so TPP countries that Indonesia does not have an FTA with (such as the US and Canada) already cannot raise their average bound tariff on Indonesian exports above 3.5 percent and 6.7 percent, respectively, even if Indonesia stays out of the TPP.

Furthermore, the cost of complying with the rules of origin to prove a product is made in Indonesia to get the lower or zero tariffs under the TPP can be 5 percent. So to go from 3.5 percent to 0 percent US tariffs on Indonesian products will increase the cost of production so that Indonesian exports effectively face a 5 percent tariff again.

Indonesia’s exports to the current TPP countries were higher ($76 billion) than imports from TPP countries ($74 billion) by the year-end 2014. Indonesia currently has a $2 billion trade surplus with TPP countries, without joining the TPP.

What is intriguing about the joining or the non-joining of Indonesia is by how much it gains or loses during the post-TPP scenario.

Using the World Integrated Trade Solutions (WITS) simulation model, estimations are made to assess the impact of tariff cuts within the TPP bloc on exports and imports of member countries as well as excluded countries. It is assumed that tariffs on all products in all TPP member countries are brought down to zero. The model not only estimates the extent of imports that may come from the TPP members into Indonesia if all tariffs are brought down to zero but is also able to provide results at product level on the trade diversion, i.e., from which non-TPP country will the imports be diverted.

The estimations reveal that, if Indonesia joins the TPP bloc, Indonesia’s goods exports to TPP countries would rise by over $3,765 million annually against a rise in goods imports from TPP countries by over $3,784 million, leaving a net deficit of $19 million in Indonesia’s goods balance of trade with the present TPP bloc.

If Indonesia remains out of the present TPP, the model shows that even if all tariffs are eliminated between the present TPP countries (which the TPP does not do), Indonesia’s trade surplus with TPP countries would only fall from $2 billion to a $1.6 billion surplus. This is likely to be an overestimate of the fall in Indonesia’s trade surplus as its highest export loss is predicted to be with the United States ($182 million) of which the largest export decline is for articles of apparel and clothing accessories, knit ($120 million).

However, this does not take into account the yarn forward rule of origin in the TPP, which requires thread and fabric, etc. to come from TPP countries and therefore restricts the amount that existing TPP countries can increase their exports of clothing to the US.

This model shows that even if the TPP comes into force without Indonesia, Indonesia will still have a goods trade surplus of $1.6 billion with TPP countries. However if Indonesia joins the TPP, that goods trade surplus would turn into a trade deficit with TPP countries of $19 million.

Since Indonesia’s trade balance is worse if it joins the TPP, compared to if it stays out of the TPP, it is not clear where Indonesia can benefit from the TPP in a way that can compensate for the likely losses to Indonesia from the other 24 chapters of the TPP. For example, the TPP’s intellectual property chapter alone will keep the prices of medicines and textbooks high in Indonesia for longer and increase the cost of inputs for Indonesian farmers and manufacturers.

The TPP’s investment chapter has strong protection of foreign investments, including providing investor-to-state dispute settlement with the most litigious investors in the world, the US, who have a 98 percent chance of a broad interpretation of their rights in these disputes and the TPP sets no maximum limit on the damages the governments have to pay them (e.g. one country recently had 180 days to pay a foreign investor $50 billion under provisions equivalent to those in the TPP).

These TPP investment chapter provisions are equivalent to those in Indonesia’s bilateral investment treaties which have proven to be so problematic that Indonesia is currently withdrawing from them. Indonesia will not be able to change these TPP rules if it joins the TPP.______________________________________

The writer is a senior lecturer at Multimedia University, Malaysia. He holds a PhD degree in economics from Jawaharlal Nehru University, New Delhi, and has worked on several trade agreements issues.

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